1. The exam consists of 6 pages, including this cover sheet.
Please check now to ensure your copy is complete.

2. The exam is open book; you are free to consult any written
materials, and you should have available to you all the assigned course
materials.

3. You may not communicate with any person about the contents of the
exam while it is being administered, even if you have turned in or not yet
picked up your own copy. If during the exam you have any questions regarding
its administration, you should contact the office of Academic Services and
they will contact me if necessary.

4. Your exam is due 24 hours after you pick it up, or at the end of
the exam period, whichever is earlier. The exam period ends at 4 pm on Friday,
December 21. You must return your exam in person, and also must return your
copy of the exam questions.

5. There are three questions on the exam, each with a separate word
limit. You may not use any leftover space from one question in answering
another; and any attempt to use shorthand or nonstandard abbreviations will be
counted as if full words were used. Answers exceeding the word limit will be
penalized by reducing their score in proportion to the excess.

To ensure compliance with the word limit, you must provide a word count for
each question. You may have your word processor program perform the count, or
alternatively you may make a good faith estimate by counting the words in a
sample paragraph or page and extrapolating to the length of the entire exam.

6. To ensure that you receive full credit for your answer, please:
(a) write or print your exam ticket number on all parts of your exam; (b)
begin your answer to each question on a new sheet of paper, or if you are
writing in a bluebook, in a separate bluebook; (c) use double spacing and
1-inch margins, so that I have enough room to make notations on your exam.

7. Unless otherwise directed, you should assume that Revised Article
9 is in force and applies to any transactions or disputes you are asked to
discuss.

8. Good luck on the exam; and for any of you graduating at the end of
the term, best wishes. I will post grades on the class website as soon as they
are ready, and will post a feedback memo as soon as possible after that.

QUESTION 1 (a
of exam, 1000-word limit)

The law firm of Lemon, Melon, and Nomel ("LMN," or "the
firm") agreed to represent a group of plaintiffs in environmental
litigation against the Chemtron Corporation on a contingent fee basis. Under
the fee agreement, LMN was to receive a one-third share of any recovery, but
would not be entitled to any payments until the conclusion of litigation.
Because the Chemtron case constituted 70% of LMN’s workload at the time,
this arrangement resulted in severe cash flow problems for the firm’s
partners. In order to finance expenses during the pendency of the litigation,
accordingly, LMN borrowed $300,000 from First Bank, and pledged the fee
receivable as security. The firm and each of its partners signed a set of
notes, guaranties, and security agreements relating to the loan; and First
Bank filed a financing statement in the Secretary of State’s office, listing
the firm as debtor and listing the collateral as "accounts and other
receivables, and proceeds thereof." Most of the $300,000 was then spent
or distributed to the partners. The firm did maintain a bank account at First
Bank, which currently holds a balance of approximately $50,000 — some
fraction of which may be traceable to the original loan. The Chemtron case is
still pending.

Following a disagreement among LMN partners regarding
settlement strategy, however, Lemon, the founding partner, left the law firm
and took the Chemtron plaintiffs ("the clients") with her. The
clients, following Lemon’s directions, sent a letter to LMN terminating the
original representation agreement, and then signed a new representation
agreement naming Lemon as sole lawyer. Lemon’s former partners
("M&N") then sued her, demanding that she immediately cease
representation of the clients, and that she return to the firm all materials
related to the Chemtron litigation. They also requested the court to place a
lien on any payments that Lemon might receive from the clients or that might
be paid to Lemon on behalf of the clients. Lemon countersued, requesting
dissolution of the partnership. This lawsuit is also still pending; no lien or
any other relief has been granted.

Lemon has now approached Second Bank in hopes of obtaining
financing for her new solo practice. She wants to borrow another $300,000 to
finance the continuation of the Chemtron litigation, as well as her litigation
against M&N. An independent expert retained by Second Bank to analyze the
value of these claims reports that the environmental claim against Chemtron
could be worth anything from zero to $12 million, with the most plausible
settlement figure being $3 million. Under either representation agreement —
the original LMN agreement, or Lemon’s subsequent solo agreement —
potential attorneys’ fees would thus range from zero to $4 million, with the
most likely amount being $1 million. The outcome of the partnership litigation
is harder to evaluate. Lemon’s position is that her old firm is entitled to
a portion of any recovery on the contingent fee as compensation for the work
done prior to her leaving the firm, but that the portion of the recovery
attributable to work she has done since leaving the firm should go to her
alone. M&N’s position is that Lemon has converted partnership property,
and that they are entitled to a full share in any recovery. Additionally, they
argue that under the partnership agreement, no assets of the firm may be
pledged as security without the unanimous consent of the partners. It is
difficult to tell who will win in this litigation, and both sides seem eager
to settle so as to avoid wasting resources that would be better spent pursuing
claims against the firm’s opponents.

You have been asked to advise Second Bank on whether to
lend to Lemon under these circumstances, and on what precautions to take to
protect the bank’s interest in being repaid if the loan is made. What is
your advice?

QUESTION 2 (a
of exam, 1000-word limit)

Dragonfly Motor Sports is a franchised retail dealer for Zippo motorcycles.
It operates a showroom from which it leases and sells motorcycles; and it also
operates parts and service departments. Approximately 65% of Dragonfly’s
revenues come from sales, some of which are for cash and some of which are
under installment credit contracts. Approximately 10% of Dragonfly’s
revenues come from leases, and the other 30% comes from the parts and service
departments.

The Zippo company loaned money to Dragonfly to finance its
purchase of new motorcycles; in connection with this loan, Zippo took and
perfected a security interest in Dragonfly’s inventory, including
after-acquired property. Subsequently, Dragonfly decided to expand the
secondhand side of its business, and applied to Commercial Bank and Trust
("Commercial") for additional financing. After extensive
negotiations, Commercial agreed to provide Dragonfly with funds to buy used
motorcycles; in exchange, Dragonfly signed a security agreement that granted
Commercial a security interest in "inventory," which Commercial
promptly perfected by filing. Under this loan agreement, furthermore,
Commercial also required Dragonfly to hand over all title certificates
relating to the motorcycles in its inventory. Commercial kept these title
certificates in a lockbox, and released them only as Dragonfly made retail
sales. It also required Dragonfly to turn over any lease or installment credit
contracts it received from retail customers; these contracts were also kept in
a separate lockbox.

Unfortunately, this arrangement with Commercial contravened
a negative pledge clause that appeared in Dragonfly’s security agreement
with Zippo, as well as an exclusive dealing clause that appeared in Zippo’s
standard franchise contract. When Zippo discovered what Dragonfly had been
doing, it gave notice that it was terminating Dragonfly’s franchise. Zippo
also sent a letter to Commercial demanding the return of all title
certificates and all sales and lease contracts. The letter indicated that if
Commercial did not promptly comply with Zippo’s demand , Zippo would pursue
legal action against Commercial, which might include tort claims for
conversion and for intentional interference with contractual relations.

Independently, the "Gray Wolfpack," a group of
recreational motorcyclists consisting primarily of senior citizens and
organized under state law as a non-profit association, had acquired twenty
motorcycles from Dragonfly under a contract that was styled as a lease but
that entitled the Wolfpack to purchase the cycles at any time during the lease
period for an amount equal to 85% of the remaining lease payments. Commercial
retained possession of the title certificates for these motorcycles, but
neither Commercial nor Dragonfly filed any sort of financing statement against
the Wolfpack, even for precautionary purposes. Unfortunately the Wolfpack had
difficulty attracting members and defaulted on their contract with Dragonfly.
Before Dragonfly could get the motorcycles back, the Wolfpack filed for
bankruptcy.

You have been retained by Commercial Bank to advise them in
settlement negotiations with Zippo. To what assets are your clients entitled,
and what potential liability do they bear to the other parties involved in the
case?

QUESTION 3 (a
of exam, 1000-word limit)

Dagwood, the owner of Coney Island Tanning Center, an unincorporated sole
proprietorship, borrowed $60,000 from the Cozy Finance Company
("CFC") in order to buy business equipment, including tanning lamps,
float tanks, exercise tables, and a sauna bath. He granted CFC a security
interest in the equipment, and authorized CFC to file a financing statement
covering the equipment, which CFC did ten days later. This financing statement
listed the debtor as "Derwood Dagwood d/b/a Coney Island Tanning
Center," and listed the collateral as "business equipment and
inventory." For the debtor’s address, it provided Dagwood’s home
address, not his business address. A year then passed by, during which Dagwood
moved his residence to another address in the same town, and CFC was acquired
by another company, Vulture Capital (VC). As part of the acquisition, CFC
merged into Vulture and ceased to exist as an independent entity.

By this time, Dagwood had also fallen behind in his loan
payments, and with accrued interest the outstanding amount on the loan was now
$64,000. After a series of dunning letters and phone calls failed to induce
Dagwood to bring his account up to date, VC sent a team of repossessors to
Dagwood’s business premises. By plan, the repo team arrived on a business
holiday, when Dagwood and other senior staff were away from the office. They
obtained admission to the premises by presenting to an inexperienced assistant
manager a document that, while purporting to be a court order, was actually
issued by VC. The equipment was repossessed without objection and stored at a
warehouse.

The next day, VC sent notice of foreclosure to Dagwood at
his former home address, which had never been updated in company records. This
notice stated that VC intended to sell the equipment at public auction if
Dagwood did not promptly repay the equipment loan. Three weeks later, after
advertising the event in a local newspaper, VC held a public foreclosure sale.
No one showed up at the sale except VC’s representatives, who submitted a
bid in the amount of $16,000 — 25% of the outstanding value of the loan. VC
then sent Dagwood a letter demanding payment of the deficiency, $48,000. This
second letter was sent to Dagwood’s business address via certified mail, and
was received the next day. This was the first that Dagwood learned about the
auction.

Dagwood did not have $48,000; and he was also facing tax
liens and various unsecured claims he could not pay either. After consulting
with his lawyer, Dagwood signed a contract in which he sold the exclusive
right to use the trade name "Coney Island Tanning Center" to his
brother-in-law Arnie, in exchange for $500; this contract also included a
covenant not to compete with any similar business Arnie might choose to
operate. He also paid Arnie (who is also his landlord) two months’ rent on
his business premises, and then filed for bankruptcy.

You have been named as trustee in Dagwood’s bankruptcy
proceedings. As part of your standard operating procedure when beginning a new
case, you run a search for Article 9 filings against Dagwood, using his full
legal name with middle initial, "Derwood P. Dagwood." Because the
computer software used by the local filing office uses a particularly
inflexible search logic that returns only literal matches, this search fails
to uncover any financing statements filed against "Derwood Dagwood"
or "Derwood Dagwood d/b/a Coney Island Tanning Center. " Had there
been any financing statements filed against "Derwood P. Dagwood d/b/a
Coney Island Tanning Center," it would not have uncovered those either.

Make a list of all the claims and defenses you plan to assert on behalf of
Dagwood’s estate, and why. Please also include your best assessment of how
likely your arguments are to prevail.